For reasons that are hard to understand, even for someone who understands derivatives, this ETN (ticker: TVIX) seems to be a very sick product. Unit creation was halted for about a month, and after issuance of TVIX units recommenced, TVIX promptly lost some 60% of its value. (For more on this, see the ETF Focus, "Volatility's Treacherous Niche.")

TVIX'S FAILURE SUGGESTS that leveraged exchange-traded notes and exchange-traded funds have substantial problems. The TVIX disaster might be an isolated incident, but it could evidence broader problems in how these complicated products are manufactured and marketed to investors.

Not too long ago, the final 30 minutes of stock-market trading was unusually erratic and volatile. Some market participants blamed this volatility on leveraged exchange-traded funds that were trading futures to try to generate double or triple the returns of various stock indexes. Some denied that these ETFs adversely influence stock trading, though it is undeniable that the futures market heavily influences stock prices.

Media reports suggest that the SEC is reviewing TVIX and that FINRA has also joined the fray. I'd applaud this. You should not only immediately review how TVIX and similar products are created, but also how they are marketed to individual investors.

The SEC's Website plainly states that the agency is the investor's advocate and protector. Investigating the TVIX debacle and the leveraged ETF and ETN market in general would demonstrate that those high-minded words have meaning.

Debacles like TVIX and the canceled BATS IPO perpetuate the idea that the market is too difficult for small investors to understand and is rigged against their interests.

In an ideal world, the TVIX incident would make it abundantly clear to most individuals that they should ignore that ETN and similar products. But this isn't an ideal world. Some sophisticated traders discuss TVIX as a third derivative, and maybe even a fourth derivative, which they know to avoid because it introduces layers of complexity and fog. But not everyone is sophisticated enough to realize this. TVIX is apparently based on the VIX, which is based on the Standard & Poor's 500 index's implied volatility, and extra return is generated by futures contracts.

Derivatives are complicated enough without adding extra moving parts. The further away you get from the underlying asset, the more problems that arise. This is why so many hedge funds like TVIX.

Naturally, many unsophisticated investors bought TVIX, thinking it was as straightforward as the marketing pitch for it, basically: Buy this product and earn twice the daily return of the VIX.

YES, REGULATORY FILINGS SPELL out the risks, but they're hard to understand. Perhaps, like cigarette boxes, this exchange-traded note—and some other investment products—should carry a warning label: Unsuitable for Individual Investors.

Observes a senior trader at a major trading firm, when asked about TVIX: "If an investment bank is selling you the product designed by their financial engineers, chances are it is a better deal for the banks than you."

The SEC should take action. Here's a chance to demonstrate that it truly is the investor's advocate and protector.